The Consumer Federation of America (Federation), a 501(c)(4)4 lobbying organization, effectively received Federal funds under the EPA cooperative agreements in violation of the Lobbying Disclosure Act. The Lobbying Disclosure Act provides, in pertinent part, that “[a]n organization described in section 501(c)(4) of the Internal Revenue Code, which engages in lobbying activities, shall not be eligible for the receipt of Federal funds constituting an award, grant, or loan.” From 1998 to 2002, the Federation estimated that it spent approximately $940,000 in direct lobbying costs. The estimated lobbying costs were included in semiannual reports to the U.S. Senate, as required by the Lobbying Disclosure Act

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1998 $220,000 $200,000 $420,000 1999 $180,000 $60,000 $240,000

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2001 $60,000 $40,000 $100,000 2002 $60,000 $40,000 $100,000

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As stated in the Background section of the report, the Foundation was the official recipient of Federal funds under the five EPA cooperative agreements. The Foundation, a 501(c)(3)4 nonprofit organization, was originally established by the Federation in 1972 as the Paul H. Douglas Research Center, Inc. The name was subsequently changed to the Consumer Research Council in 1997. The name was again changed in 1999 to the Consumer Federation of America Foundation.

Under the Lobbying Disclosure Act, we note that it is permissible for a 501(c)(4) lobbying organization to separately incorporate an affiliated 501(c)(4) non-lobbying Organizations described in the Internal Revenue Code, Section 501 (c)(4) are social welfare organizations operated exclusively to promo te social welfare. Section 501(c)(4) organizations may engage in an unlimited amount of lobbying, provided that the lobbying is related to the organization’s tax exempt status. Section 501(c)(3) organizations are commonly referred to under the general heading of "charitable organizations." Unlike a Section 501(c)(4) organization, a Section 501(c)(3) organization may not attempt to influence legislation as a substantial part of its activities and it may not participate at all in campaign activity for or against political candidates.

organization, which could receive Federal funds. The legislative history to the Lobbying Disclosure Act, expressly recognizes such an arrangement.5 In this case, the Federation used the previously established Foundation to receive the EPA assistance agreement funds.

Despite the legal separation, however, the Foundation had no employees, space, or overhead expenses that were separate from the Federation. Instead the Federation performed or managed all the work under the agreements. Thus, all labor costs proposed and claimed under the agreements were for Federation employees. Similarly, the overhead costs proposed and claimed were for the Federation’s overhead costs.

Therefore, although EPA funds were awarded to a 501(c)(3) organization, in actuality, a 501(c)(4) lobbying organization performed the work and ultimately received the funds.

This arrangement clearly violates the Lobbying Disclosure Act prohibition on a 501(c)(4) organization which engages in lobbying from receiving Federal funds.

In summary, the Federation, a 501(c)(4) organization: (1) performed direct lobbying of Congress, and (2) received Federal funds contrary to the Lobbying Disclosure Act.

Consequently, all the costs claimed and paid under the agreements are statutorily unallowable.

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The recipient argued that it disclosed to EPA grant officials the nature of the arrangement, that both organizations “shared staff and facilities” and that EPA approved of the separate incorporation. The recipient argued that at no time did any EPA program official or grants management official suggest that the receipt of Federal funds by the Foundation was illegal.

The recipient also argued that a 501(c)(3) or a non-lobbying 501(c)(4) may share directors, facilities and staff and may be all but indistinguishable from the non-lobbying 501(c)(4), without losing its eligibility under the Section 18 of the Lobbying Disclosure Act, as long as the organizations respect their separate incorporation and maintain separate books of accounts. The Foundation and the Federation did maintain separate books. The recipient also mentioned that the Federation was working under a contract with the Foundation for its administrative and technical support. The recipient further argued that the OIG’s interpretation of the Lobbying Disclosure Act was wrong and unsupported and that OIG lacked authority to adopt a “broad interpretation.” The House Report (Judiciary Committee) No. 104-339 states, in relevant part: “This Section provides that organizations described in Se ction 5 01(c)(4) of the Internal R evenue Code which engage in lobbying activities shall not be eligible for the receipt o f Federal fund s constituting an award, grant, loa n or any other form. Und er this provision, 5 01(c)(4) organizations may form affiliate organizations in which to carry on their lobbying activities with non-federal funds.” Auditor’s Reply The recipient’s first argument ignores the fact that compliance with the Lobbying Disclosure Act is the sole responsibility of the Federation. EPA is not responsible for determining the correct status of the Federation and whether it was eligible to receive Federal funds. Second, the recipient argues that it was compliant with the Lobbying Disclosure Act because both organizations were separately incorporated and kept “separate books.” Our audit, however, disclosed that the Foundation had no employees, space, or overhead expenses. Instead, the Federation provided the Foundation with the employees, space, and overhead, and charged the Foundation for the work performed under the EPA agreements.

The Federation argued that it had a valid contract with the Foundation. The “contract” was undated and unsigned. Even if there was a valid contract, we question the validity of awarding a contract without competition to an affiliate organization. The awarding of all contracts under assistance agreements must follow the procurement procedures under Title 40 CFR 30.40 through 30.48. The Foundation did not follow these procurement procedures when awarding work to the Federation. For instance, the provisions of Title 40 CFR 30.42 provides that no employee, officer, or agent shall participate in the selection, award, or administration of a contract supported by Federal funds if a real or apparent conflict of interest would be involved. Since, the Federation’s executive director also signed the cooperative agreements as executive director of either the Consumer Research Council or the Consumer Federation of America Foundation, there was a conflict of interest between the organizations.

We agree with the recipient’s argument that a 501(c)(3) or a non-lobbying (emphasis added) 501(c)(4) may share directors, facilities, and staff and may be all but indistinguishable from the non-lobbying 501(c)(4), without losing its eligibility under the Section 18 of the Lobbying Disclosure Act as long as the organizations respect their separate incorporation and maintain separate books of accounts. However, the Federation was not a non-lobbying 501(c)(4) organization and cannot receive Federal funds through either a grant or a contract.

In summary, our position is that the Federation received Federal funds in direct violation of the Lobbying Disclosure Act. Consequently, all costs remain questioned.

Inadequate Financial Management System The recipient’s6 financial management system was not adequate to account for the source and application of funds for Federally-sponsored activities as required by Title 40 CFR

30.21. Specifically, the recipient did not or could not: (1) separately identify and accumulate the costs for all direct activities, such as membership support, lobbying, and For reporting purposes, the two entities associated with the EPA agreements, the Consumer Federation of America and the Consumer Federation of A merica Founda tion, will be jointly referred to as the recipient.

public outreach; (2) maintain an adequate labor distribution system; (3) reconcile the reported outlays to the recipient’s general ledger; (4) provide a summary of claimed contract costs by contractor; (5) submit indirect cost rates to EPA; and (6) prepare written procedures for allocating costs to final cost objectives.

The recipient did not separately identify and accumulate all the costs associated with its membership, lobbying, and public outreach activities. Office of Management and Budget (OMB) Circular A-122, Attachment A, subparagraph B(4), provides that the costs of activities performed primarily as a service to members, clients, or the general public when significant and necessary to the organization’s mission must be treated as direct costs whether or not allowable and be allocated an equitable share of indirect costs. Some

• Providing services and information to members, legislative or administrative bodies, or the public.

• Promotion, lobbying, or other forms of public relations.

• Meetings and conferences, except those held to conduct the general administration of the organization.

The recipient’s membership activities include but are not limited to all labor and expenses to maintain the membership rolls and provide benefits to existing members; maintaining the recipient’s web site; and costs to recruit new members.

The recipient’s lobbying activities include all labor and expenses for: (1) the estimated 17 employees involved in the recipient’s lobbying activities as defined by OMB Circular AAttachment B, Paragraph 25; and (2) the employees responsible for the oversight of the recipient’s lobbying activities.

The recipient’s public outreach includes all labor and expenses to publish and distribute press releases, studies, guides, brochures, and web sites sponsored or managed by the recipient.

In accordance with OMB Circular A-122, all direct costs associated with membership, lobbying activities, and public outreach, including fringe benefits and overhead costs, should have been separately identified in the accounting records. However, the recipient did not structure its financial management system to identify membership, lobbying, and public outreach efforts as direct activities. Further, as discussed below, the recipient did not maintain an adequate labor distribution system to track labor efforts expended on any project, and the recipient’s general ledgers did not include accounts needed to accumulate all expenses relating to membership, lobbying, and public outreach activities.

Recipient’s Response

With one minor exception, neither the Foundation nor the Federation incurred any costs providing “services” within the meaning of Attachment A, subparagraph B(4). During the period covered by the audit, the Federation did not recruit new members, had no benefit or service programs targeted primarily at members, did not lobby on behalf of members, and held no meetings or conferences primarily for the benefit of members. The Federation did not offer benefits to the Federation’s members exclusively, or on terms or conditions different from those offered to non-members. Although the Federation members could receive benefits from its programs (i.e. publications, email information, technical assistance and conferences, and a small amount of consumer lobbying) these benefits were received primarily as consumers in general, not as a membership organization. The Federation functioned as public interest organization whose purpose was to serve the interests of consumers in general, not as a membership organization.

The Federation also stated that some travel costs estimated at about $11,000 per year may have been allocable to membership activities. However, nearly all of these costs were charged direct. Thus, the total amount arguably covered by Attachment A, subparagraph B(4), if any, certainly qualified as a “minor amount” within the meaning of Attachment A, subparagraph B(2) and may be treated as indirect costs.

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